Banking depositors perceive failures at financial institutions as failures on the part of auditors, reducing their assessment of the credibility of an auditing firm, according to a new study.
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"We found that depositors — people who have money at banks — lose faith in an auditor when that auditor is associated with another bank that fails," said Matthew Beck, assistant professor of business at the University of Kansas, in a statement Tuesday. He co-wrote the study with Allison Nicoletti of the University of Pennsylvania and Sarah Stuber of Texas A&M University.
The team of researchers looked at data sets from various banks and used statistical analysis to find relationships between various factors, wondering whether an auditor would get blamed when a bank fails. They determined that exposure to failure through the audit firm is associated with lower uninsured deposit growth, which is consistent with depositors perceiving this as a negative signal of auditor credibility. The data also showed the results are stronger when awareness of the failure is greater, including when a larger bank is involved or when significant news coverage occurs.
Beck was surprised to learn while doing this research that not all banks get audited.
"You need to have over $500 million in assets at a bank in order for an audit to be required," he stated. "Smaller banks — such as a single branch bank in a small town — may not be audited." Before entering academia, Beck worked as an auditor for KPMG in Richmond, Virginia, and Prague, Czech Republic, before joining the University of Kansas four years ago.
"Having an unstable banking system is a bad thing for the economy," Beck said in a statement. "Understanding that this sort of thing can happen is beneficial to know. It gives banks a chance to be proactive and tell depositors, 'Hey, a client of our auditors failed … but it had nothing to do with the audit.'"
